If you are a regular reader of these Weekly Views From The Corner, you may recognize the on-going theme that has developed dating back to week ending April 22nd of sector and sub-industry rotation. This was identified for the first time since the S&P 500 (SPX) launched off its bottom in early February from our quantifiable rating system of the S&P 500 and its 9 sectors. We call this system SPX9 for short.
(Its purpose is several fold. One broad purpose though is its ability to provide us an on-going dialogue if you will, from the SPX itself, of its general state of health, sector and sub-industry leadership via its 107 sub-industry ratings, general economic information as viewed through markets and central themes as they unfold to enhance portfolio decisions.)
The importance of the SPX9 signal of rotation within its member sectors and sub-industries is that rarely do we see rotation begin without volatility coming along with it at best, and at worst, a market correction/downturn. With the fresh signal at that time, it was identified and shared that a new theme of rotation had begun and later Weekly Views continued to reaffirm the theme was in place. As we now stand, with this Weekly View, said rotation has now solidly turned into deterioration which raises the concern/likelihood of a market correction.
The important question is can this deterioration lead to a normal correction that will be just that, a correction, or will it turn into something much worse such as a revisit to the February lows? Through the lens of rotation, now solidly showing deterioration, monitoring this question without a preconceived answer is crucial. SPX9, in part, will play a role of providing the answer along the way. As we stand currently, caution and prudence remains warranted – as offered week ending April 22nd – with only more emphasis here in mid-May.
Drilling down a bit, SPX9 overall H&UP ratings (see footnote) have dropped down to 41% versus 53% the previous week. For perspective, week ending April 22nd this overall H&UP rating was 71%. This is a significant reduction in the span of four reporting periods with downside momentum picking up – hence deterioration.
More concerning is the on-going lack of offensively oriented sectors being recognized leaders of the SPX structure by actually putting in new highs and trending higher – the basic requirement of any healthy, strong leading market vehicle. The building case for the Technology sector being such a leader was completely thwarted during the week of April 22nd. Since then, it has failed and is currently struggling to hold onto a semblance of health. In fact, far more concerning as it currently stands, is the view that it may want to be a “leader” to the downside which would be a negative message for the overall market.
Adding to the Technology failure is the much more up-to-date behavior of the Consumer Discretionary sector. In the last several weeks this sector was flirting on-and-off with breaking upward to the previous high water mark, and from there, an expected new high break-out. To this point, it has not been able to achieve either with this past week being particularly troubling. In the front part of the week it had attempted to, yet again, make it to a recent high point and looking as though it would run to the aforementioned high water mark. Instead, by week ending, it had turned south on higher volume putting in a distribution day (a negative) and simultaneously going below its 50 day moving average. In addition, other technical measures were violated leaving this on the cusp of leading, offensively oriented sector failing its attempt at building strength. This type of behavior, coupled with its own sub-industry H&UP deterioration offers concerns and reflects the overall theme of rotation now leading to deterioration via SPX9.
As we currently stand, we have two on-going defensive sectors – Utilities & Consumer Staples – being recognized leaders of the S&P 500. These defensively oriented sectors being the leading sectors is not a message of vibrancy and health from the SPX9 system. With this, caution and prudence – a repeated view posted April 22nd – remains the operative stance.
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I wish you well…
Director, Market Research & Portfolio Analysis
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.